These 4 Measures Indicate That China Satellite Communications (SHSE:601698) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, China Satellite Communications Co., Ltd. (SHSE:601698) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Satellite Communications

What Is China Satellite Communications's Net Debt?

As you can see below, China Satellite Communications had CN¥15.0m of debt at March 2024, down from CN¥20.0m a year prior. However, its balance sheet shows it holds CN¥7.28b in cash, so it actually has CN¥7.26b net cash.

How Healthy Is China Satellite Communications' Balance Sheet?

We can see from the most recent balance sheet that China Satellite Communications had liabilities of CN¥1.75b falling due within a year, and liabilities of CN¥1.29b due beyond that. Offsetting these obligations, it had cash of CN¥7.28b as well as receivables valued at CN¥666.2m due within 12 months. So it actually has CN¥4.90b more liquid assets than total liabilities.

This short term liquidity is a sign that China Satellite Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Satellite Communications has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that China Satellite Communications has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is China Satellite Communications's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Satellite Communications may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, China Satellite Communications reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Satellite Communications has net cash of CN¥7.26b, as well as more liquid assets than liabilities. So we are not troubled with China Satellite Communications's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for China Satellite Communications you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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